What Is the Penalty for Closing an IRA Account?
If you were to withdraw all of your individual retirement account (IRA) funds before the year you turn 59 1/2, you might be subject to a 10 percent early withdrawal penalty, in addition to any applicable income taxes.
Other People Are Reading
-
Function
-
Because IRAs are intended to provide a tax shelter for retirement savings, the Internal Revenue Service (IRS) imposes a 10 percent penalty on withdrawals you take before you turn 59 1/2, unless you qualify for a penalty exception.
Types
-
The taxable amount of an early IRA withdrawal depends on the type of IRA you have: traditional or Roth. Though the 10 percent penalty applies to both, each has a different set of rules that govern how much of an early withdrawal is penalized.
-
Roth IRA Penalties
-
You are allowed to withdraw the total amount of your Roth IRA contributions at any time, without paying tax or penalties. The penalty does apply to investment earnings and taxable rollovers, however.
Considerations
-
If you lost money on your Roth IRA investments and the account is worth less than your total contributions, you can close it without penalty. You may even be eligible to take a tax write-off on your losses.
Traditional IRA Penalties
-
Early withdrawals from a traditional IRA are subject to the 10 percent penalty, whether the money is taken from contributions or earnings. In addition, you'll owe income taxes on the withdrawal the year you close the account.
Penalty Exceptions
-
You can duck the early withdrawal penalty if you use the money for specific reasons, such as making a down payment on your first home or paying for certain education expenses and unreimbursed medical bills.
-
References
Resources
- Photo Credit A businessman calculating expenses at tax time image by Christopher Meder from Fotolia.com
